H&E Equipment Services (NASDAQ: HEES) has reported a 4.5% increase in total revenues during its second quarter of 2024 earnings call, reaching $376.3 million. Despite facing lower non-residential spending and a decline in the sale of rental equipment by 11.9%, the company's rental revenues grew by 7.2% to $275.5 million, driven by rental rates and expansion initiatives.
The company's optimism is fueled by the growth opportunities presented by mega projects and increased infrastructure spending. However, they also anticipate pressure on EBITDA margins in the latter half of the year. H&E's strategic expansion has led to a 45% increase in branch growth since mid-2021, and they plan to continue this trajectory, targeting regions with robust construction activity.
Key Takeaways
- H&E Equipment Services expanded its US branch network to 31 states, with a 45% growth since mid-2021.
- Total revenues increased by 4.5% to $376.3 million, with rental revenues up by 7.2%.
- The company opened 15 new locations and completed three acquisitions, focusing on long-term growth regions.
- Despite expansion, H&E faces challenges with utilization rates and expects EBITDA margin pressures.
- H&E is strategically managing its fleet to capitalize on mega project opportunities and expects to generate healthy free cash flow in 2024.
Company Outlook
- H&E plans to continue geographic expansion, targeting high-growth construction regions.
- The company aims to generate meaningful free cash flow in 2024 and to become consistently free cash flow positive within four to five years.
- H&E is optimistic about the outlook for 2025, though it considers it too early for precise predictions.
Bearish Highlights
- Lower non-residential spending has led to declines in key financial metrics, including an 11.9% decrease in the sale of rental equipment.
- Utilization rates disappointed in the quarter and are expected to face further pressure.
- Some pressure on EBITDA flow-through margins is anticipated in the second half of the year.
Bullish Highlights
- The company's young fleet and strong operating execution, supported by advanced IT systems, are seen as key advantages.
- H&E is focusing on attractive mega projects such as data centers, solar farms, and LNG export facilities, which present significant growth opportunities.
- The company's backlog of mega projects has been growing substantially year-over-year.
Misses
- The company sold older equipment with minimal inflationary impact but did not meet utilization rate targets.
- They expect to throttle down on fleet sales in the second half of the year to optimize fleet allocation.
Q&A Highlights
- Executives expressed confidence in their fleet management strategy and capital expenditure plans.
- H&E is not currently focused on specialty equipment but sees potential for future expansion in that area.
- The company sees a multiyear opportunity in infrastructure spending and is in the early stages of this trend.
H&E Equipment Services remains steadfast in its growth strategy, despite the current challenges in the market. With a focus on mega projects and infrastructure spending, the company is positioning itself to leverage opportunities for expansion and revenue growth. By acquiring smaller companies and enhancing their technology offerings, H&E aims to maintain a competitive edge in the rental equipment industry. Investors will be watching closely as the company navigates the balance between expansion and the pressures on utilization rates and margins.
InvestingPro Insights
H&E Equipment Services (NASDAQ: HEES) has shown resilience in its second quarter of 2024, with a notable 4.5% increase in total revenues and a strategic focus on rental revenue growth and expansion. Here are some InvestingPro Insights that may offer additional context to the company's performance and outlook:
InvestingPro Data indicates that H&E Equipment Services has a market capitalization of approximately $1.86 billion. The company's P/E ratio stands at 11.53, reflecting investor sentiment on its earnings capacity. Additionally, a robust revenue growth of 12.8% over the last twelve months underscores the company's successful expansion efforts.
An InvestingPro Tip to consider is the company's significant debt burden, which could influence its financial flexibility and investment decisions. Another pertinent InvestingPro Tip is the stock's volatility, which investors should bear in mind, especially those looking for stable returns.
Despite the challenges posed by market conditions, H&E Equipment Services has maintained dividend payments for 11 consecutive years, demonstrating a commitment to shareholder returns. This, combined with a strong return over the last month, suggests a positive short-term investor outlook.
For those interested in further insights, there are additional InvestingPro Tips available on the platform, including analyst predictions and profitability assessments. Visit https://www.investing.com/pro/HEES for a comprehensive list of tips and metrics that can help in making informed investment decisions.
Full transcript - H&E Equipment Ser (HEES) Q2 2024:
Operator: Good morning, and welcome to the H&E Equipment Services Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.
Jeff Chastain: Thank you, operator, and good morning. Welcome to everyone on today's call to review our second quarter 2024 financial performance. A press release following our results for the quarter was issued earlier today and can be found along with all supporting statements and schedules on the H&E website, that's www.he-equipment.com. A slide presentation will accompany today's discussion and is also posted on our website under the Investor Relations tab in Events & Presentations. On Slide 2, you'll see, joining me on today's call is Brad Barber, Chief Executive Officer; John Engquist, President and Chief Operating Officer; and Leslie Magee, Chief Financial Officer and Corporate Secretary. Brad will begin this morning's review. But before I turn the call over to him, please proceed to Slide 3, as I remind you that today's call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations, and statements containing words such as may, could, believe, expect, anticipate, and other similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement contained in the company's slide presentation for today's call and includes the risks described in the risk factors in the company's annual report on Form 10-K and other periodic reports. Investors, potential investors, and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call. Also, we are referencing non-GAAP financial measures during today's call. You will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure, and an associated reconciliation as supporting schedules to our press release and in the appendix to today's presentation materials. With the initial details of our call complete, I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment.
Brad Barber: Thank you, Jeff. Good morning. Welcome to our review of second quarter 2024 financial results. As always, we appreciate your continued interest in H&E. Proceed to Slide 4. The further expansion of our branch network was a highlight in the second quarter as we demonstrated significant year-over-year growth in our branch count and increased our US penetration to 31 states. The expansion served as an important catalyst for growth in the quarter, helping to offset a more challenging business environment as lower non-residential spending led to declines in key fundamentals. We experienced growth across most financial measures but at a decreased rate of improvement compared to the second quarter of 2023. I'll expand my comments on key financial metrics and offer some observations on the performance of our rental business. Also, an update on the industry developments and opportunities is in order given the transitory state of construction markets. I will close with a quick review of our progress to date on our expansion objectives and what lies ahead as we continue to demonstrate one of the industry's most successful growth profiles. Leslie will follow with a more detailed review of our second-quarter financial performance, and then we'll be happy to address any questions. Slide 6, please. Second quarter results were generally mixed. Of note, total revenues increased 4.5%, with the improvement partially offset by an 11.9% decline in the sale of rental equipment. Margin on the sale of our rental equipment in the quarter remained near record levels. Total equipment rental revenues increased 7.2%, reflecting a modest rise in rental rates with a more impactful support from expansion initiatives, which I'll discuss in greater detail in a moment. On a trailing 12-month basis, our equipment rental revenues improved 14.6% compared to the trailing 12 months ending June 30th, 2023. Margins for both the second quarter and trailing 12 months were slightly lower. Finally, our fleet size, as measured by original equipment costs, increased 10.7%, representing the lowest reported year-over-year growth since the fourth quarter of 2021, a 2.5-year period when we expanded our fleet by more than 55%. Slide 7, please. Turning to highlights from our rental operations, revenues in the second quarter improved 6.5% compared to the year-ago quarter, with margins of 51% compared to 51.8% over the same period of comparison. On a trailing 12-month basis ending June 30th, 2024, rental revenues were 14.4% higher. The growth in revenues demonstrated the significant expansion of our branch network and continued gains from rental rates. Since the close of the second quarter in 2023, we opened 15 new locations throughout our -- through our accelerated new location program, including seven openings through the first six months of 2024. An eighth location was opened following the close of the second quarter. Also since November 2023, eight additional branches were added resulting from three separate acquisitions. Our focus on expansion is an ongoing multi-year effort positioning our company in attractive geographic regions with excellent opportunity for long-term growth. Rental rates in the quarter improved 1.9% compared to the year-ago quarter, with a decline of 0.1% on a sequential quarterly basis. Although year-over-year comparisons are becoming increasingly difficult, rate appreciation over the preceding 24 months ending June 30, 2024, was 7.1%. Physical fleet utilization in the second quarter averaged 66.4%, a decline of 290 basis points compared to the year-ago quarter. The decline largely related to a reduction in small and medium-sized construction projects and a slower pace of new project starts. The second quarter measure represents a 280 basis point improvement from physical utilization recorded in the first quarter of 2024. Finally, dollar utilization in the second quarter was 38.6% compared to 40.6% in the second quarter of 2023, with the lower outcome due largely to a decline in physical utilization. Next, I want to address our view of current industry conditions and growing opportunities as we navigate the second half of 2024. Slide 8, please. We maintain our view of a more moderate pace for construction spending and project -- and projected starts. The shift in the business cycle which we addressed during our last quarterly update is indicative of an industry that is transitioning to a more normalized business environment compared to the years of 2022 and 2023. Recall during those years, we observed a period of exceptionally strong growth in construction spending, resulted in -- resulting in elevated industry fundamentals. The sharp acceleration in spending incurred during a period of extremely tight equipment availability aggravated by material disruption in supply chains. In 2024, supply chains have recovered, leading to an ample supply of most equipment lines, while persistently elevated interest rates and more stringent lending standards continue to have an adverse effect on project activity, especially smaller projects which are a component of local project opportunities. Despite this industry backdrop, we are encouraged by the continued expansion of megaproject activity across numerous locations in the US, representing a source of protracted demand for our equipment. Our participation in these multiyear projects continues to grow as our branch expansion efforts lead to increased density and scale. According to Dodge Construction Network, in fact, 342 projects with a projected value of $400 million or greater are planned or in progress in our 31 state branch network. Approximately 68% of these projects fall within our Gulf Coast, Southeast and Mid-Atlantic regions, which together represent 65% of our current branch count. Mega projects are a meaningful growth opportunity for H&E and our industry. And given their size and long duration, they provide a more stable base of demand in support of key fundamental -- key industry fundamentals. In addition to growth in mega projects, further support is expected from infrastructure spending, with increased funding expected to lead greater project activity. With project expansion expected from both of these major sources of spending, you can see why the latest forecast of 2024 construction spending from Dodge Construction data concludes an increased level of spending compared to the year-ago levels. Also, the DMI, which is Dodge's measure of the value of non-residential projects going into planning, has been flat or increased for the first six months of 2024, an encouraging indication for growth in project activity for 2025 and beyond. We are confident in the prospects for our industry and therefore remain committed to our growth objectives. Slide 9, please. We continued to successfully execute our growth strategy with near-record achievement in the second quarter. We opened six branch locations during the quarter which followed a single branch opening in the first quarter, enhancing our presence in the Southeast, Gulf Coast, and Mid-Atlantic regions of the US. These areas represent attractive geographies with increased construction activity and excellent long-term potential. Also, the completion of our latest acquisition in May 2024 resulted in the addition of four branches in northern and central Montana, increasing our presence in the state to six locations while improving our exposure to a diverse set of project opportunities. We concluded the second quarter of 2024 with 149 branches across 31 states, representing a growth of approximately 45% in the last 36 months ending June 30th, 2024. Our targeted goal of 12 to 15 new branch openings, excluding acquired branches, is well within reach as we move into the second half of the year. Since the close of the second quarter, we announced the opening of a location in Idaho Falls, Idaho, adding to our presence in the Intermountain region and increasing our total number of new locations year-to-date to eight. Our 2024 growth fleet expenditures, which we revised last quarter, remain in a range of $350 million to $400 million as we leverage our record 2023 expenditures in our young fleet age to meet prevailing market demand. In closing, H&E has made tremendous strides over the last three years, growing our presence across the US while establishing a solid record of achievement in supporting, improving financial performance and value creation. We are a pure-play rental company that has achieved an industry-leading 45% increase in branch growth since mid-2021, establishing a growing geographic presence in established and emerging regions of opportunity. With this expanded presence comes improving access to the rising mega project activity encompassing data centers, solar farm installations, advanced manufacturing projects, and LNG export facilities, to name a few. Our young fleet age and outstanding mix of equipment are important attributes of our company, as is our strong execution at the operating level, including advanced IT systems that cover the rental life cycle while facilitating the needs of our customers. Expanding these other elements of our operating profile remains a core focus of our management as we position H&E to succeed in today's business environment, as well as for the next leg of the construction cycle. Now on to Slide 10 and I'm going to turn the call over to Leslie, who will discuss our second-quarter financial performance in greater detail. Leslie?
Leslie Magee: Thank you, Brad. Good morning, and welcome everyone. I'll begin this morning with Slide 11 and a review of second-quarter revenues, gross profit, and profit margins. Revenues in the second quarter totaled $376.3 million, an improvement of $16.1 million or 4.5% compared to the second quarter of 2023. The growth was substantially due to higher rental revenues and sales of new equipment. Rental revenues grew $16.8 million or 6.5%, to $275.5 million compared to $258.7 million in the year-ago quarter. Further expansion of our branch network was one of the several factors contributing to the improved outcome. Since the close of the second quarter of 2023, our branch count increased 18.3% or 23 locations, with 15 of the locations a product of our warm start strategy and eight other locations resulting from the closing of three acquisitions. Also, our fleet original equipment cost, or OEC increased $279 million, or 10.7% over the same period of comparison, concluding the second quarter of 2024 at approximately $2.9 billion. Finally, rental rates in the quarter were 1.9% better than the year-ago quarter while declining 0.1% on a sequential quarterly basis. Partially offsetting revenues in the quarter was lower, physical utilization which averaged 66.4% or 290 basis points below the year-ago outcome. On a sequential quarterly basis, average physical utilization improved 280 basis points. Revenues from the sale of new equipment increased 20.5% to $10.7 million following a pickup in the sales of aerial work platforms and material handling equipment. Sales of rental equipment declined 11.9% compared to the year-ago quarter to $34.9 million. The result, which was 27% lower on a sequential quarterly basis, reflects an alignment of our fleet management strategy with prevailing industry fundamentals. The average age of equipment sold in the quarter was an estimated 71 months. Gross profit in the second quarter totaled $171.3 million, up 1.7% from the second quarter in 2023. The gross margin of 45.5% was 120 basis points below the year-ago result, as lower margins on rentals and an unfavorable revenue mix were partially offset by higher margins on sales of rental equipment. In the second quarter of 2024, total equipment rental margins were 45.5% compared to 46.7%, with rental margins of 51% compared to 51.8%. Finally, margins on sales of rental equipment remained elevated at 62.4% compared to 59.1%, while margins on sales of new equipment improved to 16.9% compared to 14.9%. Slide 12, please. Income from operations of $62.8 million was $6.7 million lower in the second quarter compared to the same quarter of 2023. The 9.7% decrease resulted in a margin of 16.7% of revenues in the second quarter compared to 19.3% in the year-ago quarter, with the lower margin due primarily to higher SG&A expense, lower rental margins, and an unfavorable revenue mix. The decline was partially offset by higher gross margins on sales of rental equipment. Proceed to Slide 13, please. Net income in the second quarter was $33.3 million or $0.91 per diluted share compared to net income of $41.2 million, or $1.14 per diluted share in the second quarter of 2023. Our effective income tax rate in the second quarter was 27.8% compared to 26.3% for the same quarter in 2023. Proceed to Slide 14, please. Adjusted EBITDA in the second quarter increased 2.8% to $173.2 million compared to $168.6 million in the year-ago quarter. Our adjusted EBITDA margin in the second quarter was 46% compared to 46.8% in the year-ago quarter. Higher SG&A expenses were partially offset by an increase in gain on sales of PP&E and exceptionally high margins on sale of rental equipment. Next, Slide 15, please. SG&A expense in the second quarter totaled $111.8 million, or 12.7% greater than $99.3 million in the year-ago quarter. The increase was largely due to our steady growth initiatives with 23 branches open since the close of the second quarter of 2023, contributing to increased employee salaries, wages, payroll taxes and other benefits, and higher depreciation and amortization expense. Also, higher expenses relating to facilities, liability insurance and professional fees contributed to the year-over-year increase. SG&A in the second quarter was 29.7% of revenues compared to 27.6% in the second quarter of 2023 and included $10.8 million of costs associated with our branch expansion and acquisition activities. Slide 16, please. Gross rental fleet capital expenditures in the second quarter totaled $122.1 million with net rental fleet capital expenditures of $87.2 million. For the six months ended June 30th, 2024, these figures were $196.5 million and $113.8 million, respectively. In addition, gross PP&E capital expenditures in the second quarter were $37.9 million, or $34.1 million net of sales of PP&E. And for the six months ended June 30th, 2024, gross PP&E capital expenditures totaled $77.1 million with net PP&E capital expenditures of $71.5 million. Free cash flow used was $82 million compared to free cash flow used of $134 million over the same period of comparison and excluding acquisitions, adjusted free cash flow for the six months ended June 30th, 2024 was $75.7 million. Slide 17, please. Based on original equipment cost, our fleet size on June 30th, 2024, was approximately $2.9 billion, an increase of $279 million, or 10.7% compared to our OEC on June 30th, 2023, and includes approximately $109 million in fleet acquired. We closed the second quarter with an average fleet age of 40 months compared to an industry average age of 48.1 months. Average dollar utilization in the second quarter of 2024 was 38.6% compared to 40.6% in the year-ago quarter. As Brad previously noted, the decline was due primarily to lower physical utilization. The measure was up 160 basis points on a sequential quarterly basis. Slide 18, please. A review of the balance sheet reveals the continuation of a solid capital position, including a net leverage ratio of 2.2 times, which remains well within our target range of 2 times to 3 times, and no debt maturities before December 2028 on our $1.25 billion of senior unsecured notes in our senior credit facility. Slide 19, please. Finally, we closed the second quarter with liquidity of $459 million, while excess availability under the ABL facility was approximately $1.7 billion compared to $1.8 billion on December 31st, 2023. Our minimum availability as defined by the ABL agreement remains $75 million and with our excess availability of $1.7 billion, we remain free of any covenant concerns. And finally, we paid our regular quarterly dividend of $0.275 per share of common stock in the second quarter of 2024. And while dividends are subject to board approval, it is our intent to continue to pay the dividend. Moving to Slide 20, please. And to conclude, I confidently stay that H&E as a stronger company in 2024, possessing greater geographic reach, a larger more diverse fleet, and a solid capital structure, and an experienced management team accustomed to managing a pivot in the business cycle. With these essential attributes in place, we move ahead in 2024, continuing our focus on the expansion of our geographic footprint, establishing increased scale in regions where construction spending and growth trends are exceptional. With 150 branches currently in operation, we intend to grow our participation in the multiyear mega project opportunity which, as Brad noted, has an expanding presence across our 31 state network. Also, our previously announced decision to reduce our 2024 gross fleet expenditures while leveraging both our record spending over the past two years and our young fleet age, positions the company for meaningful free cash flow generation in 2024 when adjusted for transactions. When combined with available capital resources, we possess ample liquidity to pursue additional expansion opportunities in an industry with a 10% year-over-year growth expectation in 2024 according to Dodge Construction Network. Operator, we are now ready to begin the Q&A period. Please provide instructions.
Operator: [Operator Instructions] The first question comes from Tim Thein with Raymond James. Please go ahead.
Tim Thein: Great. Thank you. Good morning. I had a -- I guess, the first question was just on the rate environment and how -- if you think about I guess relative to your expectations, how things have transpired. Obviously, you have responded in terms of base -- back to the last quarter, in terms of resetting your CapEx kind of outlook. I'm just curious how you've seen the industry as a whole kind of respond and accordingly, so it's basically looking back in terms of how rates perform relative to your expectations and how you're expecting that to play out as we look through the balance of the year. And again, we'll start again on rental rates. Thanks.
Brad Barber: Thank you, Tim, and good morning. Rental rates performed basically as expected. Our anticipation has been that there was an opportunity for them to continue to very incrementally improve, potentially be flat or slightly down and I mean, 0.1% behind -- 0.02% excuse me, in Q1 and 0.01% this quarter. So, we accept rates where they are. Our utilization was slightly disappointing. I mean, we hoped that we would see a little bit more improvement in physical utilization within the quarter than we did. With that as a backdrop, not surprised by rates in the least. On a go-forward basis, as we're continuing to expand our presence on mega projects on a weekly basis. I expect rates to come under more pressure. Now, I want to be clear, I don't expect any grand rate decreases on a go-forward basis. But I think the likelihood for rates to decrease on a sequential basis going forward absolutely exists, not because we're discounting at all in our local markets for the small or medium-sized work that we continue to participate on, just simply due to the weighting that we're starting to build up with mega projects. As you know, mega projects consume vast amounts of equipment for very elongated periods of time. In our view, when we do the calculations that the yield result is still very positive for H&E, but however, that could and is likely to lead to some slight degradation in rates on a sequential basis moving forward.
Tim Thein: Got it. Okay, that's helpful. And then, Brad, just on the -- how should we think about, as you look at the fleet growth of, call it, 11% relative to equipment revenue growth of closer to 7%, what -- how should we think about the dynamic of just cycling through higher cost equipment without a corresponding uplift in rental revenue? In terms of the inflationary component, is there a way to size that in terms of what that impact is, and I would expect will continue to be a headwind just given the amount of equipment inflation for the past couple of years?
Brad Barber: Yeah. As Leslie stated in our prepared comments, what we sold out of the fleet was 71 months old. So there's certainly an incremental inflationary headwind. I want to -- I don't want to understate it, but that's really minimal in the scheme of what we're facing as our utilization. Look, we've moderated our spending to allow us to come into a better balance with supply and demand and for physical utilization to improve. As I stated, yeah, we were a little dissatisfied and I've seen slightly more improvement in physical utilization during the quarter. That being said, that inflationary impact does not cause me any real concern. There's mix involved, there's certainly something there, but it's nothing that's going to hurt anyone's modeling. It's a minimal piece of what's occurring in the overall scheme of things.
Tim Thein: Okay. Okay, last quick on, Brad. What -- I know this is a hard one, and I guess that probably the $64,000 question, but this whole dynamic of softness in the local accounts, which you're not alone in flagging, obviously, a bit more rate-sensitive in parts of that market. Have you -- has history shown any kind of relationship? And again, I know each cycle is different and very difficult to answer, but just in terms of, if there were -- if we were to start to see some cuts to benchmark rates, what -- how those markets have historically responded in terms of a lag to changes in policy rates?
Brad Barber: Let me answer it this way. I expect zero decline in small and medium, or let's just call it, local work. That we're not anticipating any decreases. In some cases, we're still getting incremental increases in certain regions with certain products. The discipline that exists, the data that we all possess, and I'm speaking of H&E and our larger peer group, which substantially dominate these marketplaces, we're all using the same set of data. And I believe we are very focused on assuring that we continue to give good returns on invested capital. So, if we go back to prior cycles, you said it right. Each prior cycle has been characterized differently. I don't know that we would even consider COVID, but I think there was an extreme amount of discipline shown in the face of the substantial decline in COVID. And I think there, I have very little -- I have basically no concern at this point that small and medium-sized work or small and medium-sized customers are going to start to enjoy any type of decline in rental rates. I think our rental rate output will be a product of how much product we put on mega projects on a go-forward basis.
Tim Thein: Got it. Thank you for the time.
Brad Barber: Yeah. Thank you for your question.
Operator: The next question comes from Sherif El-Sabbahy with Bank of America (NYSE:BAC). Please go ahead.
Sherif El-Sabbahy: Hi. Good morning. Thanks for taking my question. Just to begin, both you and a large peer have noted that 2024 is a transition type of year to more normalized growth. Do you expect 2025 to see another leg up in growth, or do you expect this to be the new normal type of growth rate for the medium term?
Brad Barber: Sherif, it's really early to try to make that type of prediction. I'll tell you, we're fairly optimistic around here and believe that there's a lot of work to be done. The small and medium work that has been impacted by these higher for longer interest rates, I think that could pivot relatively quickly. So I think it's going to depend on when we see interest rates actually start to decline. Within that, I think would be the answer to the outlook. I don't envision a 2025 declining from 2024 levels. And I think there's an opportunity that things could get substantially better if interest rates were to decline sooner and maybe more rapidly than our current view tells us. So it's to be seen, but we don't feel bad about 2025. I'm just not sure how bullish we are on '25 just yet.
Sherif El-Sabbahy: Understood. And just given some of your language around mega projects, seems like you're still seeing very good uptake on those types of projects. Just for the remainder of the year, what kind of incremental flow-through do you expect to see on EBITDA?
Brad Barber: Leslie, can you help Sherif with the flow-through?
Leslie Magee: Sure. So a lot of the drivers we've talked about here this morning, but we do expect some pressure on EBITDA flow-through margins in the back half of 2024. And again, those themes are driven by moderating year-over-year rate increases which we've talked about, continued expectations of lower year-over-year physical utilization. And then one thing to note is we also expect lower year-over-year fleet sales in the back half. And we spoke to that earlier in the year, and we haven't seen that play out in a big way. And we expect that to increase to a larger degree in the back half of the year. And then also, we're going to have higher cost driven by our focus on our new store openings.
Sherif El-Sabbahy: Thank you.
Operator: The next question comes from Stanley Elliott with Stifel. Please go ahead.
Stanley Elliott: Hey, good morning, everybody. Thank you for the question. Brad, you talked a little bit on the utilization side. I was curious maybe how did that track through the quarter? And I guess I was trying to get a sense for, if some of that disappointment was from weather impacting the availability of the equipment out in the market, or if that really was kind of more of what we're seeing, which is some of the smaller local contractors softening a touch.
John Engquist: Yeah, Stanley, this is John. I'll take that. And look, I don't think we're going to point to weather is a material impact to utilization. Really what we're seeing is fewer small and midsize jobs coming out of the ground. And as we continue to see a ramp up with the large mega projects, our participation, we're very pleased with our participant rate on these large jobs. And we're seeing continued fleet on a weekly basis, more and more fleet are going out each and every week. But really what we saw was, you know, more of a decline in the small to mid-size jobs which had that impact on utilization.
Stanley Elliott: And with the scale that you guys have kind of built over the past several years. And Leslie kind of mentioned it on the free cash flow side, how should investors think about H&E's ability to generate stronger free cash flow through the cycle?
Brad Barber: Yes. Well, through the cycle, a great question. Obviously, this year we're going to generate nice, very healthy free cash flow at the growth. As you know, we've continued to pay our dividend and are going to continue paying our dividend. Our focus on these 12 to 15 new locations is ironclad. Unless we were to see a real -- not a transition, but a real disruption, we're going to continue to open those up. And as you know, we continue to peck away at tuck-in acquisitions. And so we've only been able to perfect four of those since 2021, but three of them more recently, and so we're still actively pursuing those. All of that mashed together with our traditional spending makes it a challenge for us to be free cash flow positive on an annual basis. That being said, we will be approaching a scale in our modeling, probably in the four year to five year range, with the type of growth profile that we have illustrated over the last few years, that we'll be generating free cash flow. So in the short run, when we're opportunistic and the markets are heating up and growing, we're going to grow with them. But this year, we're certainly going to produce free cash flow. So we'll have some puts and takes depending on the given year for the next few years. And we should settle into a nice rhythm that allows us to be free cash flow positive throughout the cycle.
Stanley Elliott: And with kind of the larger mega projects out there, your ability to add scale not only service those projects, but probably cuts down on your delivered costs just from the ability to share. It would seem like that, with that mega project dynamic still looking to accelerate that we should continue to think about you all remaining pretty focused on this, on the growth platforms that you guys are putting out there.
Brad Barber: That's right. We're just going to be disciplined and measured about doing so. And I think that's reflected in our CapEx reduction this year. We're always going to focus on returns and we're going to focus on the bottom line profitability, while we balance that against growth opportunity. But we have substantial growth opportunity in front of us with our 150 location, 31-state geography.
Stanley Elliott: Perfect, guys. Thanks so much and best of luck.
Brad Barber: Thanks, Stan.
Operator: The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Steven Ramsey: Hi. Good morning. I'm curious for you guys, or if you're seeing it, competitors, the movement of fleet around the network to optimize your positioning to capture activity in good markets and maybe reduce exposure to slower markets. I know that's normal course of business, but maybe how does it compare year-to-date versus those normal times?
John Engquist: Steve, this is John. It's -- there's nothing terribly different this year compared to any previous years. Moving fleet from low-demand areas to those with higher demand is just basic fleet management. We do that every year. What I can tell you is, we have moved a considerable amount of fleet around in the first half of the year from some areas that are a little bit softer to capitalize on this mega project opportunity. So again, nothing really unique there from what we've done on any other given year.
Brad Barber: Yeah. Steven, let me add, and Leslie mentioned in her comment, we're talking about flow through. We are absolutely going to throttle down on fleet sales just thinking about fleet management. Fleet sales in the back half of the year will see a nice decrease compared to the front half of the year that we've just completed. And that's a part of that product of fleet management. In a nutshell, we have got the fleet allocated where we want it. And what we have left coming is going to go very strategically to the locations who are performing at the highest level and ensure that we continue to participate and get exposure to these mega project opportunities.
Steven Ramsey: Okay, that's helpful. And then thinking about mega projects clearly, H&E, more [indiscernible] focused, some larger public peers have a larger base of specialty gear. Does -- do you feel like you're capturing all of the opportunity on these mega projects that you could, or do you feel like your business serving these types of projects gives you a right to win with specialty equipment and maybe spurs you to invest more in that type of fleet?
Brad Barber: Look, I don't know that we've ever run across a project where we've gotten enough that we didn't want more. And your question is very fair. And that is, could we provide more if we had more? For us, specialty still continues to fit in the nice to have and not need to have. We would -- we have a small element especially. We're growing it organically. It's -- at the level it's at currently, it's not really worth speaking about on calls, but we will continue to grow it over a period of time. That will be -- we view that as future or pent-up opportunity. That being stated, there's general rental product on every single mega project in every single geography we serve. And within that lies a lot of opportunity for H&E to continue to expand our exposure.
Steven Ramsey: Okay, that's helpful. Thank you.
Brad Barber: Thank you, Steve.
Operator: The next question comes from Avi Jaroslawicz with UBS. Please go ahead.
Avi Jaroslawicz: Hey, good morning, guys. So just a quick question here on your CapEx. I know you held the guide this quarter, but how are you thinking about CapEx for the rest of the year and have your plans changed at all between same-store spending versus new branches? As in, have you shifted any of the spend that you're planning on from the same stores to new locations? And also, how confident are you that we won't need to cut CapEx here further this year?
Brad Barber: Yeah, Avi, thank you for the question. You know, we've got a similar case. We may be a little front-end loaded on CapEx, but we're going to have a very traditional cadence regarding our CapEx to the question of are we moving from same store to new location? That's not. We view these all in separate channels of spending and we plan associated. So we're not taking from one to give to the others. Leslie said, our access to capital, our cost of capital, we are not worried about capital constraints. We're purely focused on performance and returns. So that being stated, that's not an issue for us. Going forward, how comfortable are we with our CapEx guidance? Listen, we are going to be disciplined. Currently, we're comfortable with the reduced $350 million to $400 million. If we see a reason to decrease, we would do so. I just don't feel like that's going to be an issue for us. If someone were to say what are the chances you go above your high end of your guidance, I'm going to tell you that's not going to happen this year. We're focused on being disciplined. We're in a seasonal business. Q3 is always the peak of the seasonality. I suspect it'll be again here in 2024 and we're comfortable with the guidance we put forward.
Avi Jaroslawicz: Okay, that makes sense. And then just sticking back into utilization for a second year. So last quarter you noted that time utilization was just north of 70%, start of Q2, I believe. So seems like there was a big deceleration in May and June. I know warm starts are a headwind, but I think you added the same amount in Q2 of last year. So can you just talk to us about what you saw with the utilization trend in Q2 throughout the quarter? And was it lower utilization across the board or were certain verticals or regions having an outsized impact there?
Brad Barber: Avi, I'm going to let John add some context, but -- the quote we made at the time is our utilization was just approaching or has touched 67%. The simple answer is, it's remained in a very similar profile since that point in time. We've had some incremental growth in fleet. John, do you want to talk about any puts or takes geographic? I mean, I know it's fairly consistent.
John Engquist: Yeah, it's fairly consistent. I mean, obviously, we've had -- some areas have had a little more of a struggle than others. But generally speaking, it's been fairly consistent. I mean, we've seen incremental improvement. Obviously, since that Q2 average of 66.4%, we're north of 67% today. When you look at Q3 -- Q2 of last year, it's 69.3%. Our third quarter average was 70%, so up about 70 basis points quarter-over-quarter. As we sit here this year, we would expect to see at least that same type of a bump on an average for Q3. And of course, as we get into the fourth quarter, seasonality sets in. That one's a little more challenging to speak about today, but I suspect we'll have an update on our next call.
Brad Barber: Avi, I think you probably caught in our prepared comments in the press release, but we're down 290 basis points year-over-year, but up 280 basis points over Q1. So, as candidly as we have stated it, we would like to be up a little more. We were hoping for a little more, but we understand the environment we're in. We're encouraged by our go-forward opportunities, and we've adjusted our capital spending accordingly to these metrics.
Avi Jaroslawicz: Yep. No, appreciate that and appreciate the correction there. That's my bad. I'll turn it over. Thank you.
Brad Barber: Thank you.
Operator: The next question comes from Alex Rygiel with B. Riley. Please go ahead.
Alex Rygiel: Thank you, and good morning, gentlemen. Could you help us to understand what percentage of your fleet is targeted to mega projects today? And/or kind of what percentage of revenue is tied to mega projects today?
Brad Barber: Alex, partly, I wish I could. I mean, obviously, we know -- we measure the amount of OEC that's on mega projects, the amount of OEC that we add on a weekly basis. And I'll tell you, while I can't provide you a number, we're not going to start providing guidance. We are very happy with the cadence of what we're seeing in the marketplace, and it's a meaningful amount that we're adding on a weekly basis. So it's a nice piece of our business. It'll continue to be a growing piece of our business. And I do not anticipate a quarter where we're not making nice gains of deploying more of our OEC to mega projects than we had the preceding quarter.
Alex Rygiel: And maybe if you can't quantify it exactly, but you've talked a lot about sort of the pipeline or backlog of mega projects sort of growing. Is there a way to think about kind of what that growth rate has looked like maybe in this current quarter or over the last 12 months or so? Is it up sort of 20% or is it up 100%? How might you kind of bracket that growth in backlog from mega projects?
Brad Barber: Yeah, I don't have a percent, but I can tell you year-over-year, it's up substantially. It's up substantially. And I think that in a year from now, I'll be able to make the same comments about this year. These projects are certainly, they're not just emerging, they've been emerging. They're advancing, and more new projects are being announced and breaking ground almost on a daily basis. So it's a substantial improvement in the last 12 months. And my anticipation is that in 12 months from now, I'll be able to say the same thing again about 2025 as compared to 2024.
Alex Rygiel: That's great. Thank you very much.
Brad Barber: Thank you.
Operator: The next question comes from Sean Wondrack with Deutsche Bank (ETR:DBKGn). Please go ahead.
Sean Wondrack: Hi there. Thank you for taking my question. Sorry, I don't mean to beat a dead horse, but just a couple more on the mega project. Is there -- are there certain gating factors that are preventing some of these smaller firms, such as breadth of equipment, or national presence, or your proprietary tech? Could you just comment on that, please?
Brad Barber: Yeah. Well, there certainly can be. Look, it's important with mega projects, and I think people confuse this sometimes. I've had an individual investor ask me, without a meaningful specialty, you're really disadvantaged. And that's certainly holistically not true. It's not the case. There are certain contractors on mega projects who use specialty products and in those cases, H&E would be disadvantaged. I can't supply someone power generation or trench or HVAC maybe on a particular job. However, there are various trade types who don't ever use those types of products, that only use the general rental, the aerial work platforms, the telehandlers, earth moving products, air compressors, things of that nature, and we're not disadvantaged. Now your question is, how do you become disadvantaged outside of that? Technology would be number one. I mean, our technology is second to no one. Again, I believe many times it's misunderstood, because at our size and scale, folks may just assume that we don't have advanced technology, but in fact we do. Our customers pay their bill online, they requisition equipment online. They manage their account. They're reporting the telematic data. The list goes on and on and on. So we're disadvantaged in no respect. If you don't have telematic data, if you do not have a portal, if you don't have an ability for your customers to consolidate their billing, pay it online, to view and manage their count more broadly, you're absolutely going to get excluded. So it's probably the top five, six companies by volume in the US who are participating. If you drive on these projects, that's what you're going to see, and you're not going to see smaller participants.
Sean Wondrack: Great. That's very helpful. And it kind of leads into my follow-up. When you just think about, the top five or six players sort of doubling their share over the last 10 years and a lack of access to these mega projects, does this create opportunities to acquire some of these mom-and-pops that maybe weren't going to sell themselves earlier, but don't have access to this market demand here?
Brad Barber: The answer is yes. We have actually purchased companies that two years or three years ago said they may never sell their business and their realities change. The cost of technology is just a hurdle they can't handle. I mean, for a number of years, the cost of capital, the access to equipment, the price that they pay compared to H&E or larger competitors is just an extreme disadvantage for them. And many more companies have come to the realization that they're either going out of business slowly or that they're going to have to sell their business. And yes, we have seen those opportunities.
Sean Wondrack: Great. Appreciate that. If I could squeeze in one more, just on the infrastructure side, and I'm not sure if you have an answer to this, but do you have an idea of maybe what inning we are in relative to the infrastructure spend? I mean, the funds came in a few years ago. There was sort of a slow rollout the past couple of years. It seems to be accelerating a little bit. It's difficult to tell kind of from where we're sitting.
John Engquist: Yeah, I'll take that question. Look, I think we're in the early innings. That while we have seen funds released, and look, these projects are breaking ground every day. I mean, from looking at the road work, bridges, airports, seaports, I mean, you name it, the infrastructure work is really starting to pick up steam. And we see this as a multiyear opportunity. So short answer is early innings.
Sean Wondrack: That's great. Thank you for answering my questions. Appreciate it.
Brad Barber: Thank you, Sean.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Brad Barber for any closing remarks.
Brad Barber: Yeah, thank you, operator. Before we conclude today's call, I want to reiterate a couple things, not the least of which is our strategic commitment to growth and our strong track record of success. As we stated earlier, H&E has established one of the most attractive growth profiles in the industry, led by a highly successful, accelerated new location program. By the end of this year, I expect H&E will be nearing 50 or more new location opens -- opening since we implemented this strategy in 2021. Over the same period of time, we've completed four tuck-in acquisitions, adding 16 additional locations. And while we've been focused on achieving the significant growth in locations, we also have been pleased with our same-store growth and margin improvement. Our shift away from distribution to pure-play rental focus has proven to be a winning strategy, providing us with greater durability in our revenues and associated margins. We remain fully committed to our accelerate new location strategy with expectation of 12 to 15 branch additions per year as we continue to pursue additional tuck-in acquisitions that meet our criteria. We possess both the people and the capital necessary to support our ongoing growth plans and we look forward to updating you on our future achievements. With this, we'll conclude today's call and we appreciate your continued interest in H&E Equipment Services and look forward to speaking to you again soon. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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